A "tipped employee" under the law is one who customarily and regularly receives more than $30 a month in tips. For a tipped employee, his or her tips may be counted as wages toward reaching the minimum wage of $7.25 per hour (the minimum wage at present). This is known as the “tip credit” because the employer receives a “credit” toward the minimum wage requirements. However, this tip credit does not release the employer of its obligation to pay each tipped employee a minimum wage. A tipped employee must be paid at least $2.13 an hour – regardless of how much is made in tips. If a tipped employee is not paid this direct wage, there may be a claim for failure to pay minimum wage. 

Federal law and Kentucky state law requires employers who use a tip credit to meet the following requirements: 

  1. Inform each tipped employee about the tip credit allowance (including amount credited) before the credit is utilized; AND
  2. Be able to show that the employee receives at least the minimum wage when direct wages and the tip credit allowance are combined; AND
  3. Allow the tipped employee to retain all tips, whether or not the employer elects to take a tip credit for tips received, except to the extent the employee participates in a valid tip pooling arrangement.

All three of these prongs must be met for a valid tip credit. If any one of these has not been met, the tip credit is invalid, and the tipped employee may have a claim for a minimum wage violation.

For instance, even if the tipped employee's hourly rate comes out to be $7.25 (including tips and direct wages), the tipped employee may still have a claim for lost wages, if he or she is not informed of the employer's intention to apply a tip credit. Additionally, if the employer fails to adequately explain the tip credit provision to the tipped employee before it is applied to the employee, the tip credit is invalid and there may be a claim for a minimum wage violation.